Choosing a financial advisor or distributor? A look at what the SEBI guidelines mean for you

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According to the SEBI guidelines set to come into effect from April 1 this year, your mutual fund distributor cannot be your advisor or vice-versa.

Your investment advisor will have to segregate clients based on whether you are paying a fee to him or are investing in products on which the advisor or the intermediaries are earning a commission.

Lovaii Navlakhi, the founder of International Money Managers, in an interview with Money9, mentioned the big change in the process due to the guidelines.

“The first key item of the guideline is that segregation has to happen at the client level. There is a small condition that every dependent of the client is also included in that. So, if I have two other dependents with me and I am going to an advisor, the advisor cannot say I will invest in products and earn no commission from me and take my other two family members and earn commission on them since they are dependent on me. So that’s the big essential change in the guidelines,” said Lovaii Navlakhi, the founder of International Money Managers.

Another key change is that an advisor should have a professional license and once the advisor crosses 150 clients, he or she has to become a non-individual advisor, which means set up a company.

“So we are registered investment advisors. We have been registered as advisors since 2014. Now as a corporate or a non-individual category, we were allowed to say that we can have clients who decide to pay us a fee and take advice and we are allowed to have a separate division that executes those products. Earlier, there was no compulsion that all those products have to be invested or put into places where there was no earning of a commission. Now it is compulsory that any new investment that I get from an advisory client cannot be into things where I am earning a commission. There are also a bunch of other things like entering into service level agreement with every client,” Navlakhi said.

In PMS products or Portfolio Management Service products, SEBI has said that every PMS provider will provide a direct plan as well as a regular plan. It was intended to ensure that direct plan becomes cheaper than what was prevailing at that time prior to the guideline.

“In reality, what we are seeing is most PMS providers are not bringing down the cost for a direct plan. They are maintaining the same cost. So I think that might require a little bit of intervention from SEBI at some point in future to correct,” he said.

Choosing between MF distributor, investment advisor and DIY

An important question is how to choose the right money manager. Should you do-it-yourself or go to a distributor or an investment advisor? According to Navlakhi, if an individual has the time and knowledge, then DIY is one of the best options.

“One of the very important things that one needs to understand is can I do it myself? What are the essential requirements for allowing you to do it yourself? One, you have a very good understanding of finance and the products. Two, you have the time to devote that is you’re not doing something else, which is going to take away your time. And third, very importantly, you have full control over your own emotions,” he said.